Customer Lifetime Value (CLTV): only the bare truth

Customer Lifetime Value (CLTV): only the bare truth

Today we decided to talk about customer lifetime value. In this article we will answer all your questions about CLTV. You can be sure that we are not going to hide any information from you!

Beyond every marketing strategy, the end target remains the same: customers. The backbone of any business is its users and they are the topmost priority. However, one question persists: to find new customers or retain existing ones?

Ask anyone and they would go with the former. After all, new customers mean more sales and hence more profits. However, when you dig deep enough, their answer is quite the contrary. Retaining existing customers is far cheaper than finding new ones while giving the same profits. To do so, one needs to understand the user’s lifetime value.

What is CLTV?

Customer Life Time Value, or CLTV, is the total value attributed to a particular customer during his entire period of association with the company.

Some people use the abbreviation CLV instead of CLTV, but it means the same. In our article we will use CLTV.

CLTV is a quantifiable entity, and you can find out the same with the help of a simple mathematical equation.

Suppose that X is the total profit that the customer garnered for the company in a year, on average.

Suppose Y is the total number of years an average customer stays in business with a company.

And Z is initial cost it took to acquire that customer.

Then, the customer lifetime value is,

CLTV = (XY) – Z

For example, if a customer contributed an average profit of $300 per year for 5 years, and the initial cost to acquire him was $100, then his CLTV would be $1400.

What Stops You From Finding the CLTV?

Finding the customer lifetime value sounds great. So why exactly do more companies use it? Well, the primary reason is the misconception that acquiring new customers is easier and more feasible than retaining existing ones. The belief is so strong that most companies don’t even bother to find out CLTV.

Even when this misconception is not present, the following roadblocks stand in the way:

Lack of Data:

Keeping track of user data is a recent phenomenon, and many companies simply never bothered about it. So they find it hard to calculate the CLTV as they don’t have data of their customers spanning many years.

New Company:

Another roadblock occurs if the company is new. How will you calculate the average customer retention over the years if your company is only a few months old? There is a solution for that, but many don’t dig deep enough to find out.

By the way, if you have a new company this topic about SEO-techniques can be extremely useful for you.

Point of No-Coming:

There are customers that could be retained, and there are those who can’t. In few scenarios, the customer is truly lost and will never do business with you again. In other cases, there is still scope for damage control. Most companies are unable to differentiate between the two scenarios.

Improving CLTV:

Now that you know what CLTV is and what were the factors that were stopping you from calculating it, let’s come to the obvious question: how does one improve the customer lifetime value?

Well, there are ways you could achieve just that:

Maintain a Relationship:

If you want your users to stay, you need to be more than a simple service provider. To instil brand loyalty, you need to maintain a relationship with them.

The “how” depends on you. You need to take steps to make your users feel special and realize that you mean a lot to them. At the minimum, send them regular “thank you” messages, expressing how grateful you are to the association with them. You can improvise and give them goodies- anything that makes them feel that they are getting rewarded for doing business with you.

Make Them Stay a Little Longer:

Subscription-based services are the trickiest when it comes to user retention, especially if users are not particularly thrilled about the service. If you want them to stay, you need to go out of your way.

One trick is to give them reasons for converting monthly subscription into annual ones. You can make annual subscription much cheaper than monthly ones. Alternatively, you can give them free months if they go for the annual ones. This could be applied for plans that extend for 2 or more years. Give them enough reasons for form a long association with you.

Emotional connections with customers are really important too. Read this article to know more about it. However, some marketers think different. You can know more through reading this book: How brands grow.

Make Users Realize That They Need You:

Any business works on mutual needs – you need them, and they need you. it is as simple as that. Focusing on making customers feel that you need them is good for making them feel special, but it is not enough. They won’t reciprocate until and unless they need you equally too.

One way to do that is by telling you customers why your company provides better services than anyone else. Be it gentle reminders or flashy messages, you need to inform them about the value they gain by associating with you. The end goal is simple: customers must feel that they are really gaining a lot by choosing you over others. When you achieve this, you can be sure that they will stay with you.

Keep Them Posted for Updates:

An important aspect of customer retention is to have a continuous dialogue with your users. Since you are the service providers, your part of the conversation must revolve around your brand and services.

Keep your customers updated about everything new that happens in your company. If there is a new offer or discount, make sure your customers know about it. If you are launching a new product or service, inform your users. Even if it is a new milestone or initiative, keep your customers in the loop.

What it achieves is imparting a sense of belonging to your customers. They feel that you care about them, enough to inform them about anything new that happens in your company. This, in turn, increases the chances of customer retention.

Conclusion:

User’s lifetime value is an extremely important parameter in deciding your growth and marketing strategies. As a business owner, you should not only be aware of the concept but actively take part in increasing the customer lifetime. In the end, it is only going to benefit you.

If you still have questions about CLTV, write in the comments and ask us!

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